Inflation is up at 7.8%, interest rates are on the rise, and there has been so much talk about global and local recessions.
In this article, we try to draw conclusions, both positive and negative, about where the economy is heading for 2023 and whether the conditions are conducive to buying or selling a business. While we don’t want to sugarcoat any bad news, we also don’t want to be cynical. Instead, we want to take a balanced view of the Australian economy to help you make the right decision about whether buying or selling a business in 2023 is a good idea.
Key points:
- The economy is facing headwinds, but are they enough to cause a recession in Australia?
- There are opportunities out there, and consolidation strategies may increase
- You must do extensive due diligence on any acquisitions
- Finance for great businesses is still suitable, but a lot more work is required to be successful
Recession or no recession for Australia?
Inflation and interest rates
The Australian Bureau of Statistics (ABS) confirmed inflation stood at 7.8% for 2022 ahead of the 7.5% expected by economists. Given the Reserve Bank of Australia’s (RBA) commitment to an ongoing target of 2%-3% inflation, this means continued rises in interest rates are likely in the foreseeable future. In the short term, until inflation shows any signs of decline, there will be some increased short-term pain for Aussie mortgage holders in 2023. The RBA has to carefully balance reducing demand in the economy and over-reacting, which may send the economy into recession. This is not just a local problem.
Inflation is a global issue, primarily driven by the extraordinary governmental and monetary policies that were required to help get us all through the pandemic years.
The energy crisis in Europe resulting from the Ukrainian war has added pressure on global inflation. In Australia, we are lucky to be commodity-rich and have access to our own gas supplies, reducing much of this additional inflationary pressure others have felt. While our inflation is high, it is in line with the RBA’s expectations of inflation peaking at 8% and subsequently falling as interest rates work their way through the economy reducing spending and therefore demand. So much so that Aussie retail sales were down 3.9% for December, according to ABS data released in late January 2023. Make sure you watch retail trends closely in 2023 if you are looking at buying a retail or e-commerce business.
House prices
With 67% of Aussies owning property (2021 census), it’s important to be conscious of how house prices affect the way consumers feel. House prices fell by 5.2% across Australia in 2022 according to CoreLogic’s home value index data. While these price falls are a little concerning, they are more the mark of a correction to the housing market that, according to CoreLogic, jumped nearly 25% during the pandemic years.
Banks are reacting cautiously to falling house prices, so if you need to borrow part of the money to buy a business, they may lower the value of your property to consider the equity as security.
Most economists believe that Australia will avoid a formal recession but that soft conditions are likely in 2023. This was highlighted by Treasurer Jim Chalmers in a January radio interview, who voiced concerns for mid-2023 when many fixed rate mortgages taken on when house prices were booming will roll over to variable rates.
Is 2023 a good time to buy or sell a business?
Yes and no. There are so many factors associated with buying businesses that it is very hard to give a definitive answer. Undoubtedly we are facing economic uncertainty, which increases risk. At its very core, the decision to buy a business depends on your own risk appetite and your access to finance.
Opportunities are out there
“Be fearful when others are greedy and greedy when others are fearful”. Wise words to investors from Warren Buffet.
When times are challenging, it's always a good time to go searching for sensibly priced businesses and occasionally bargains. Not everyone enjoys or has the ability to run a business in tough times, and many may choose to sell.
With uncertain economic conditions, you may find the early stages of running your new business may be tougher than you think - so make sure you have a cash buffer - just in case conditions worsen.
Consolidation
Many businesses consolidate during tougher times. The focus is on keeping their best customers, reducing the products they sell and putting in place strategies that keep expenses down. Many businesses will be in consolidation mode now as they weigh up where the economy is heading and may not wish to sell, hoping that they will get a better valuation when conditions improve. These could be ideal businesses to target as they have already done much of the hard work for you.
Redundancies and layoffs - a new source of buyers
In tougher times there are redundancies and lay-offs as businesses cut back their expenses. We have already seen this globally, with a number of the major tech companies (Meta, Amazon etc.) laying people off. This presents a new raft of budding entrepreneurs that have always wanted to run their own businesses. Sometimes, redundancy is the push people need to start or buy a business. With any payout, their expenses may be covered for a number of months to get a business up and running or, if large enough, to buy a business.
Due diligence is non-negotiable
It is essential you do even more due diligence than normal. Critically analyse how good the business you are buying really is. Ask the difficult questions - especially why they are selling. Are they under pressure from their bank? Or is it just retirement? This can really help your negotiations.
Be prepared to look at multiple businesses and sectors that are demonstrating growth in 2023. What will be the fastest growing markets in 2023?
Financing your acquisition
The principal sources of funds to buy a business will be:
- Your own funds
- External investors
- Banks
With increased risk, both investors and bankers are somewhat risk-averse. This translates into both investors and banks requiring far stronger proposals, so make sure your due diligence is exceptional. Remember, investors and bankers will ask tough questions. Also, expect banks to ask for property security. Some lenders do have unsecured loans available, but the criteria for acceptance are tough. You can read our loans to buy a business guide for potential finance options, but it’s important to know credit criteria are getting tougher.
The positive side for buyers is that with it being harder to raise funds, there may be less serious competition for the business you buy.
Summary
Overall, we are facing uncertain times, which are likely to continue through most of 2023. There are plenty of opportunities out there to buy a business, and you can check out the most popular categories of businesses for sale in Australia. If you want to fine-tune your requirements, try our advanced search capabilities. Be very thorough in your assessment and due diligence of the business you want to buy - especially if you need external financiers on board.
For those that want to sell a business, you can advertise your business to our growing database of serious buyers.
If you can make a business successful in tougher economic times, when the good times come back, you can ride that wave to great success. So, it's an opportunity worth exploring.
If you’d like to speak to someone about your options, please contact our team.
@Be_theBoss
